Issue #8, Spring 2008

Tradable Water Rights

To read the other essays in the “What's Next? The New Progressive Agenda” symposium, click here.

Unnoticed by many Americans, the country is facing a water crisis. The Southeast went through a record-breaking shortage this summer. The West is facing its worst drought in a century, and climate change will likely further deplete the water supply. At the same time, people are moving to Western states in droves: Census projections indicate that the population in the Western states that draw water from the Colorado River basin (Arizona, California, Colorado, Nevada, New Mexico, Utah, and Wyoming) will increase by 47 percent between 2000 and 2030.

To make things worse, the current distribution system in the West means that water doesn’t end up in the hands of those who value it most. Agriculture uses about four-fifths of the water in the West, leaving just 20 percent for the region’s fast-growing cities. And yet water is far more valuable to towns and cities. One 1992 Texas study reports that the value of water in agricultural uses ranges from $300 to $2,300 per acre-foot, compared to $6,500 to $21,000 per acre-foot in urban uses. Clearly, water must be treated like other scarce resources. In practice, this requires a system that redirects water from individuals who don’t value it highly to those who do. In other words, we need a market for water rights.

Consider the case where an extra acre-foot of water would increase a farmer’s profits by $500, but it is worth $8,000 to a growing city. Without a market, the farmer would use all of the water on agriculture. However, a market would allow the farmer to trade water to the city for money. At any price between $500 and $8,000, both would benefit. Yet under the current system, many beneficial trades do not occur, because there are only limited regional markets (such as the Colorado-Big Thompson Project and the emergency California Water Bank). In most of the West, working markets do not even exist. That’s why the federal government should establish a comprehensive water market.

There are three concrete steps that can be taken. First, the restrictions that prevent the trading of water rights across state lines should be removed. The median price for a one-year lease of an acre-foot of water in Colorado is 10 times the median price in Utah. Additionally, as much as possible, other restrictions on trades and the requirement that all trades be reviewed by bureaucrats should be removed.

Second, property rights for water must be clarified. The practice of usufruct rights, in which the state holds all water “in the public trust,” with the ability to retract or reassign rights, should be eliminated. The uncertainty caused by these policies prevents beneficial investments from being made. Differences in property-rights rules across states further complicate matters. So that purchasers know exactly what the rights entitle them to, water rights should be standardized across the West (or even the whole country)–perhaps by having the federal government purchase the existing poorly defined property rights and auction off the new ones.

Third, federal and/or state governments can reduce transaction costs in several ways. They could, for example, set up a monitoring system to determine withdrawals from the Colorado River and other important water sources. Moreover, the government could help fund a centralized market for trades if one doesn’t develop in the private market naturally. Finally, government involvement would likely be necessary to construct water transportation systems that aid trading or to clear the legal hurdles to developing these systems.

There may be legitimate concerns about equity in such a market system. Why are farmers presumed to have more rights to water than cities? As farmers will be in the position to sell water rights already granted to them, they would be well taken care of. But what about poor cities? In response, the federal government should go further and establish a population-based water minimum that is distributed to every city. As with individuals, cities could trade their allocation if their citizens decided they would rather have the income from water rights than live in those cities.

There are clear gains from having an active market in water rights. It would help solve the problems posed by current water shortages in the West, and it would provide the flexibility necessary to confront the impact of climate change on water supplies in the coming decades. It would be, in a word, fluid.


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Issue #8, Spring 2008
Post a Comment

Michel Bryan:

I agree with the premise that there is a need for a means of mobilizing water resources into their highest and best use.

However, financially well-endowed uses are not facilely aligned with true economic value. Conservation, species protection, pollution control, and aesthetics are just some examples of uses that don't necessarily have sufficient economic return to compete with other uses in a trading system, but are none-the-less very important, even vital to our economy. A purely market-driven distribution system will systematically ignore or under-supply such needs.

The second problem I see with a trading system is that it creates an economic windfall for incumbent users, making actually mobilizing water rights even more problematic because incumbents then have a strong economic incentive to entrench their rights more firmly through the political system. Incumbents will rationally see any redistribution as a prelude to permanent transfer without political guarantees of a property right to the water; and they'd be right. Thus the neccessary concominant of a trading system is stregthened property rights in water supplies to reassure incumbents of their continuing priority. Such an entrenchment is not desirable.

We'll see farmers growing rich of leasing their water rights instead of farming, for instance. There might be some unavoidable, even salutary enrichment of incumbents who lose out due to re-distribution of water rights, but we should not create a whole new class of rentiers to drag down the economy and hold hostage such a vital resource. It is as if we were to give those currently living the exclusive rights to breathe the atmosphere, and all following generation had to lease those rights from them.

No simply property system will work well when a resource is so fundamentally vital (everyone has an ethical claim on th resource), so absolutely finite, becoming de-localized by technology (incumbent uses that make sense with the resource in situ no longer do if infrastructural investments are able to move the water around), so encumbered by historical usage (many of the absurdities of water usage come from simple-to-administer rights regimes adopted at earlier times), and so laden with political choices that cannot be resolved by simple market signals (ecology vs. rural economies vs. urban development vs. etc.). I don't have any pat answers, but a trading system can only be part of a solution to how we decide to use water resources as a society, not a panacea as the author suggests.

Mar 21, 2008, 11:35 AM

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